Portfolio Rebalancing FAQ Part 3

Published: November 16, 2020 at 12:32 pm

Last Updated on November 16, 2020 at 3:03 pm

We continue answering frequently asked investor questions on portfolio rebalancing to help with practical implementation. The first part (question 1 to 13) is available here: Portfolio Rebalancing: We answer frequent questions investors worry about (part 1) and the second part (question 14 to 28) here: Portfolio Rebalancing FAQ Part 2.

Q29: How should I consider 1. Physical gold; 2. House I have already;  3. House that I already own;  4. House that I currently pay EMI while rebalancing my portfolio? A: Anything you use should not be part of a portfolio. If you get rental income, then it can be used for lowering your retirement corpus (our robo template does this) but should not be considered for rebalancing.

Q30: How to rebalance money from equity + risky debt into cash as the goal nears. Do I take it out of equity or debt or both and in what proportion? A: Sell from both in one-shot and move to cash. This could be partly liquid fund partly arbitrage fund, partly FD, SB acct. Any mix that will make you sleep better.

Q31: Choosing the various Debt components for rebalancing apart from epf/ppf among long term gilt funds/arbitrage fund/money market funds. Risks vs reward in choosing each of these funds? A: This is a personal choice. Some investors like no volatility in debt component. So for them,  “liquid” debt options are low-risk debt funds from liquid or money market or arbitrage categories. For those comfortable with volatility can use long-term gilts appropriately. See: Can we invest via SIP in gilt mutual funds for the long term?

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Q32: Can rebalancing activity can be timed – say when MOVI or such valuation index suggests that the market is at a high.A: In principle yes, with the understanding that it is primarily for risk reduction and not return enhancement.

Q33: Gilt funds are debt. Going down the line, equity has to be less and shifted to debt(gilt here). However, gilt funds are volatile over a shorter period. Is there any need to again shift to a lesser volatile debt instrument like arbitrage/money market fund? How can we do this? A: I would recommend adding less volatile debt instrument – money market or liquid) and gradually increase the exposure down the line. This is because gilt themselves are quite volatile and once cannot go from say 50% equity 50% gilts to 100% gilts when the need is near.

Q34: How should I rebalance my portfolio? Currently 98.5% FD & 1.5% MF. A: You are far away from rebalancing. Please get professional help from a SEBI registered fee-only advisor

Q35: (a). Should we look at rebalancing as a tool only to reduce risk or to get better returns as well? A: I would prefer to look at it as a goal-based risk reduction tool. This means we focus on the corpus required at any time and not the returns.  This helps be in much better control and not leave the fate of our investments to luck.

(b). Same question as many above. I am now 40% in equity, 60% EPF. My monthly/yearly investment amount that I can afford is 50-50 in index fund & pf. I’m now 32-33 years old. I don’t think I’ll reach 60-40 equity for the next 5-6 years at least. Is there a different rebalancing strategy that I should look at meanwhile other than keep investing as much as possible in index funds? Does this become more important if we land up in a decade long sideways market? A: Do not worry about rebalancing now. Focus on investing more in equity and increasing income.

(c) For 15-16 yr child education goals where I can start with 60-40 in equity, what is the better rebalancing strategy? Do I split monthly investment 60-40 and rebalance once a year, or I invest monthly such that the overall ratio comes close to 60-40 and do a hard rebalance to 60-40 once a year? Have you already run a backtest comparing these two? A: I do not see how the two are any different 🙂

(d). Combined with the 2nd point above, does it make sense to keep 5% of monthly investment in a liquid fund and add it to equity when the market falls 10-20%? I know that buying on dips alone is not TAA, but with my allocation, I can’t really afford to sell equity now. A: If it makes you happy, yes. A 5% change in allocation will not make a difference.

(e). With epf being a major part of the portfolio, how do we consider the epf interest during rebalancing? This year, I estimate that the epf interest itself will be ~5% of the portfolio, which will cause significant deviations in the AA when the interest is credited. A: Focus on increasing equity exposure 🙂

Q36: (a) I am not sure if its repeat but I will post my queries. Should one do rebalancing the folio itself(assuming a folio of N50, NN50 and S&P 500 in ratio 40:35:25)? A: You should focus on rebalancing bet equity and debt primarily. As you remove money from equity or put some into it, you can decide to do that among those funds as close as possible to your internal target. See: Should I rebalance between Nifty and Nifty Next 50 systematically?

(b) Should rebalancing be done if the folio size is small? Small is very objective here. One person’s small of 25lakh can be other’s huge amt. A: Who needs risk reduction more? The “small guy” or the “big guy”? Everyone has to rebalance. Everyone needs a plan.

Q37: Portfolio constituents and re-balancing: (assumption – portfolio has direct equity, equity MF, PPF, EPF, debt MF). Query 1 – Will direct equity be also part of re-balancing exercise? Considering it is more volatile then MF, more frequent rebalancing is required, and if we do not consider the direct equity portion, then percentage allocation will be faulty. A: Yes, it has to be part of the rebalancing exercise. Frequent selling of direct equity can be counterproductive. So once a year is good enough, in my opinion.

Q38: Rebalancing once a year on a specific date/month each year is what everyone usually suggests, rt? But on top of this, should I consider rebalancing at the time of major corrections like what did happen this year. If I usually rebalance once a year in December. And like in 2020 march/April a major correction happened, the should I ignore it and wait for December to perform the usual rebalancing? A: If there is a major up or down movement bet Jan and Dec, you can rebalance immediately. Or do it in Dec. Of course, the change can occur the month after you rebalance if your goals are far away nothing more need to be done. If you are in the middle of your investment tenure or later,  you can do another rebalance if there are equity gains.

Q39: While rebalancing, is it advisable to sell in one go or in tranches. Similarly, is it advisable to buy in tranches to average out the cost? A: one-shot both directions.

Q40: If I am a self-employed professional of age 54 and since I can practice till my health permits, say maybe till 70 yrs. My only goal is retirement and if I continue to have income though less, say by 50% and if that income is sufficient for my monthly expenses. I had no liabilities. At present, I am investing for retirement considering arbitrarily at the age of 60 and my present allocation is 50:50, so how should I rebalance and how should I reduce exposure to equity in a gradual manner? A: Please either get professional help or enrol in the lectures on goal-based portfolio management where the main topic is “how should I reduce exposure to equity in a gradual manner?”

Q41: If my E:D ratio is 40:60 due to heavy EPF with goal 15-20 years away. Should I increase the equity exposure to 60 gradually now or wait until one year considering the market is volatile? A: Waiting is a waste of time.

Q44: “From Equity”, Rebalancing into Liquid funds? Rebalancing into Arbitrage Fund? Rebalancing into Ultra-short funds? Rebalancing into Short Term Funds? Rebalancing into Corporate Bond Funds? Which is apt? What are the pros and cons? A: Rebalancing is a secondary activity. The primary activity is to decide the instruments that are suitable for your goal and suitable for your temperament in equity as well as debt.

Q45: (a) If 15 year worth (goal+ expense) is in Debt MF, yet the allocation is (D: E is 30:70), do we still need to rebalance to make it 40:60 or lower yearly? A:  Rebalancing is done only if you have a clear asset allocation in mind. If you do, then you must rebalance!

(a) If we are moving towards indexing, once the amount grows to high no, at what threshold is it advisable to open a second fund of the same category in another AMC to avoid money being locked as in case of FT?. A: Some people are okay with having 50 lakhs in the same fund. Some do not like more than five lakh. It is up to you. This is regardless of whether you are an index investor or not.

This concludes the three-part series on portfolio rebalancing. Thank you for your participation. My general impression from these questions:  Portfolio rebalancing is relevant only for those who have a proper goal-based financial plan and de-risking strategy in place from day one. If you are not confident about this, work on this first and then consider portfolio rebalancing.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)